Bermuda-based Annuity and Life Re Ltd has announced it will take a $33 million charge because of its largest annuity contract - the second multi-million dollar hit for the company in two quarters.

The news pushed the price of stock down by more than 18 percent yesterday on the New York Stock Exchange and raising questions about corporate controls within the company.

After it made the announcement, the company saw its stock nose-dive by $4.28, or 18.2 percent, to $19.25, a 52-week low as investors got the jitters. The company's 52 week high stands at $37.25.

The revelations led to ratings agency Standard & Poor's placing the company on CreditWatch with negative implications - a warning to investors wanting to buy into the stock.

The two-quarter hit was "raising concerns about corporate controls in this start-up enterprise", according to S&P.

Annuity and Life Re (Holdings), the first life reinsurer to hang out its shingle in Bermuda in 1998, had a single 'A' counterparty credit and financial strength ratings from S&P on Annuity & Life Reassurance Ltd. and Annuity & Life Reassurance America Inc.

Annuity & Life Re's announcement that it will take a $33 million charge in the fourth quarter related to its largest annuity contract follows third-quarter charges of $46.7 million related to the same contract and to other business,

Jay Burke, chief financial officer of Annuity and Life Re, said: "In the third quarter we wrote down deferred acquisition costs on this contract. During the fourth quarter we received information from our client reinsurance company that the primary carrier's investment performance was not sufficient to fund the minimum interest guarantees.

"This resulted in a significant increase in our exposure due to the excessive lapse rate. As a result, we have provided for the 2001 deficiency and a reserve for future liability. This charge will increase the damages that management is already pursuing against this reinsurer."

The charge of approximately $33 million is related to minimum interest guarantees on its largest annuity reinsurance contract which is managed by another reinsurer that has not been named. The charge comprises payments for 2001 and a reserve for anticipated future payments.

Bermuda insurance giant XL Capital has agreed to provide additional protection for up to $10 million for possible losses related to the minimum interest guarantees under this contract in excess of the charge.

Since 1998, Annuity and Life has grown quickly as its target market, primary insurers based in North America, consolidates and changes (many are demutualising), often exiting lines of business whose run-off needs to be reinsured.

The company's flagship Annuity and Life Re America unit covers term, whole, and universal life insurance policies as well as joint and survivor policies and mostly fixed annuities. It also owns life insurer Capitol Bankers Life Insurance Company (now Annuity and Life Reassurance America).

The ratings on Annuity & Life Re could be affirmed at the current level or lowered to single-'A'-minus, pending a Standard & Poor's review with management, which is expected to occur within the next 30 days.

Annuity & Life Re was formed in 1998 as a Bermuda-based life reinsurer, providing traditional and financial reinsurance solutions to life insurers in the US and Canada.

Annuity & Life Reassurance Ltd. and Annuity & Life Reassurance America Inc. are Security Circle insurers, which means that they underwent Standard & Poor's most comprehensive analysis and were assigned ratings in one of the top four categories for financial security.

Lawrence S. Doyle, president and chief executive officer said: "While we are disappointed by the poor annuity results; our core business, life reinsurance, continues to perform very well. Life premium grew over 50 percent during 2001 and we anticipate significant growth in 2002.

"Our future earnings will be primarily driven by our life business producing more stable income in the future. We expect our net operating income for the fourth quarter, excluding this charge to be between $0.32 and $0.34 per diluted share and full year 2002 to be $1.70 to $1.80."